How Advisors Should Handle the IRA and Retirement Plan Beneficiary Form

retirement-plan-beneficiary-form-trusts-the-roth-revolution-james-langeThe ability to know what to do with an IRA or retirement plan beneficiary form can often be detrimental.

First, know we are on shaky ground. The conservative and proper legal advice is to request the client have their estate attorney fill out the beneficiary designation forms.

There are several advantages of having an estate attorney fill out the forms

  • Eliminates or drastically reduces your exposure for not filling out the form correctly and consistent with the clients’ wishes
  • Presumably, the estate attorney has a “big picture” of how the estate will be distributed and the IRA and retirement plan beneficiary designation is an important piece to that entire puzzle

For most traditional clients, I prefer the plan described in chapter 12 of Retire Secure! (Wiley, 2006). The chapter, “The Ideal Beneficiary Designation of Your Retirement Plan” describes what I consider the “master plan”.

Assume that you have a traditional family with children and grandchildren or even the potential to have grandchildren in the future. Let’s also assume that your client and their spouses trust each other completely and the client’s children are by now responsible adults (if not, see the discussion about trusts below).

Primary Beneficiary:

My spouse __________________

Contingent beneficiary

My children______________, ___________, and __________equally, per stirpes

Per stirpes is Latin for by representation. Adding per stirpes is critical. Let’s assume one of your client’s children either predeceases your client or your client’s child wants to disclaim a portion of the inherited IRA to their children, i.e. your client’s grandchildren. Without the words per stirpes, (assuming that the form does not have a box to check to indicate a per stirpes designation), the share of the predeceased or disclaiming child would not go to their children, but rather to their siblings, because the majority of beneficiary forms do not assume a per stirpes distribution unless you specifically state per stirpes in the designation. Presumably, most of your clients do not want to disinherit their grandchildren. Without per stirpes, you could have a grandchild that not only lost their parent, but also lost any inheritance they may have used for support, education, etc.

I also recommend putting current addresses and social security numbers on the IRA or retirement plan beneficiary designation.

Please note, however, that even this solution is only a partial and temporary solution. This solution still allows the possibility of having your client’s grandchild (or child if they are young) drinking $1,000 per bottle champagne to celebrate their purchase of a new Hummer on their 21st birthday.

So, to do the job right, you should name a well drafted trust, either a dedicated trust or a trust that is currently part of the client’s will or living trust, for the benefit of grandchildren (or children if client’s children are young and/or not sufficiently mature to handle an inheritance). In addition, you need at least one trust for each set of your client’s children’s children. There are lots of variations on these trusts, but for the IRA beneficiary purposes, they must meet 6 specific conditions in order to preserve the “stretch IRA” for the grandchildren.

Therefore, what will be a combination of practical, yet also proper advice is to fill out the forms the way I have suggested and recommend both orally and in writing that your client see a qualified estate planning attorney to properly fill out the IRA and retirement plan beneficiary forms.

-Jim

Jim Lange, Retirement and Estate Planning A nationally recognized IRA, Roth IRA conversion, and 401(k) expert, he is a regular speaker to both consumers and professional organizations. Jim is the creator of the Lange Cascading Beneficiary Plan™, a benchmark in retirement planning with the flexibility and control it offers the surviving spouse, and the founder of The Roth IRA Institute, created to train and educate financial advisors.

Jim’s strategies have been endorsed by The Wall Street Journal (33 times), Newsweek, Money Magazine, Smart Money, Reader’s Digest, Bottom Line, and Kiplinger’s. His articles have appeared in Bottom Line, Trusts and Estates Magazine, Financial Planning, The Tax Adviser, Journal of Retirement Planning, and The Pennsylvania Lawyer magazine.

Jim is the best-selling author of Retire Secure! (Wiley, 2006 and 2009), endorsed by Charles Schwab, Larry King, Ed Slott, Jane Bryant Quinn, Roger Ibbotson and The Roth Revolution, Pay Taxes Once and Never Again endorsed by Ed Slott, Natalie Choate and Bob Keebler.

If you’d like to be reminded as to when the book is coming out please fill out the form below.

Thank you.

Save

Save

Trusts as Beneficiaries of Retirement Plans: A Possible Alternative to the Stretch IRA?

trusts james langeIf you’ve read my earlier posts, you know that much of the new edition of Retire Secure! addresses the ramifications of the legislation that, if passed, will kill the Stretch IRA. If this potential change is a concern for your family, then Chapter 17 is a “must-read” for you because it offers a possible alternative that will allow them to continue the tax deferral of your retirement plan for many years.

Trusts may be appropriate in many situations. We use them for young beneficiaries who, by law, cannot inherit money, and for older beneficiaries who can’t be trusted with money. Trusts can also be used to help minimize taxes at death (although this is not as common as in previous years). With more frequency, though, our office is using trusts to replace the benefits of the Stretch IRA. This application started when all of these campaigns to kill the Stretch IRA began, and we began to seek alternatives for our clients. Chapter 17 compares the value of an IRA assuming that the non-spouse beneficiary must withdraw the proceeds within 5 years, to the value of an IRA when it is protected by a specific type of trust. I think you will find the results very surprising.

The rules governing trusts are very complex, and, if you are interested in incorporating them in to your own estate plan, you will need the assistance of a competent professional.

Do you donate to charity? If so, my next post will cover the changes in the laws that affect charitable contributions.

All the best,

Jim

Jim Lange, Retirement and Estate Planning A nationally recognized IRA, Roth IRA conversion, and 401(k) expert, he is a regular speaker to both consumers and professional organizations. Jim is the creator of the Lange Cascading Beneficiary Plan™, a benchmark in retirement planning with the flexibility and control it offers the surviving spouse, and the founder of The Roth IRA Institute, created to train and educate financial advisors.

Jim’s strategies have been endorsed by The Wall Street Journal (33 times), Newsweek, Money Magazine, Smart Money, Reader’s Digest, Bottom Line, and Kiplinger’s. His articles have appeared in Bottom Line, Trusts and Estates Magazine, Financial Planning, The Tax Adviser, Journal of Retirement Planning, and The Pennsylvania Lawyer magazine.

Jim is the best-selling author of Retire Secure! (Wiley, 2006 and 2009), endorsed by Charles Schwab, Larry King, Ed Slott, Jane Bryant Quinn, Roger Ibbotson and The Roth Revolution, Pay Taxes Once and Never Again endorsed by Ed Slott, Natalie Choate and Bob Keebler.

If you’d like to be reminded as to when the book is coming out please fill out the form below.

Save

Changing Beneficiary Designations for Retirement Plans: Why A One-size-fits-all Approach is Definitely Not Appropriate

retirement-plans-james-lange-pittsburgh-paI had some reservations about writing Chapter 16. Chapter 15 discusses the perils of filling out your own beneficiary forms, and Chapter 16 talks about filling out beneficiary forms. It sounds counter-intuitive, but there is a method to my madness!

The reason I wrote Chapter 16 was because I thought that my readers probably wouldn’t find it very helpful to have me tell them, “Don’t do the wrong thing!” without also offering a very clear explanation of what the wrong thing is. Some folks might be disappointed that Chapter 16 is not a step-by-step guide about the “right” way to prepare your beneficiary designations. Unfortunately, that would have been an impossible task because it is one area of estate planning where a one-size-fits-all approach is definitely not appropriate. Chapter 16 is intended to offer general guidance only, and I hope you’ll consult with a professional about your own situation.

As it is becoming more common to see trusts as part of estate plans, I thought it would be helpful to go over some of the finer points of naming trusts as beneficiaries of your IRA or retirement plans. Frequently, trusts are used to “protect” assets – whether it be from taxes, creditors, or whatever the case may be. If the beneficiary designations of your trust are not precisely accurate, the trust cannot be funded. That means that the money will stay in the retirement plan, and not go in to the trust. Your heirs can try to explain to the IRS that you made a minor mistake when filling out your beneficiary form, and your intentions were really something other than what you wrote. The cost of asking the IRS to agree to your executor’s interpretation of what a beneficiary designation was supposed to be (also called a private letter ruling) is, as of this writing, about $18,000 – and there’s no guarantee that they’re going to agree with your executor anyway. If they don’t agree, then all of the work you went through to establish the trust was for nothing. So why risk the protection that you had hoped to offer by setting up the trust? Please consider using a competent professional to help you with your beneficiary forms!

Chapter 17 continues this discussion by reviewing the different types of trusts you can use as a beneficiary of your retirement plan. Check back soon!

-Jim

Jim Lange, Retirement and Estate Planning A nationally recognized IRA, Roth IRA conversion, and 401(k) expert, he is a regular speaker to both consumers and professional organizations. Jim is the creator of the Lange Cascading Beneficiary Plan™, a benchmark in retirement planning with the flexibility and control it offers the surviving spouse, and the founder of The Roth IRA Institute, created to train and educate financial advisors.

Jim’s strategies have been endorsed by The Wall Street Journal (33 times), Newsweek, Money Magazine, Smart Money, Reader’s Digest, Bottom Line, and Kiplinger’s. His articles have appeared in Bottom Line, Trusts and Estates Magazine, Financial Planning, The Tax Adviser, Journal of Retirement Planning, and The Pennsylvania Lawyer magazine.

Jim is the best-selling author of Retire Secure! (Wiley, 2006 and 2009), endorsed by Charles Schwab, Larry King, Ed Slott, Jane Bryant Quinn, Roger Ibbotson and The Roth Revolution, Pay Taxes Once and Never Again endorsed by Ed Slott, Natalie Choate and Bob Keebler.

If you’d like to be reminded as to when the book is coming out please fill out the form below.

Thank you.

Save

The Ideal Beneficiary for your IRA or Retirement Plan

beneficiary-designation-retirement-plan-james-langeGive Your Heirs as Much Flexibility as Possible

I gave serious thought to changing the title of Chapter 15, which discusses the ideal beneficiary for your retirement plan, to “My Pet Peeve”. This is because of how annoying I find it to see people spend thousands of dollars to create elaborate wills and trusts, only to render them useless because they carelessly listed the wrong beneficiary on their retirement plan. Unfortunately, it’s an all too common mistake.

What follows here is one of the most, if not THE most, important concepts in the book. Your will and trust documents do not control the distribution of your IRA or retirement plans. Any account that has a specific beneficiary designation will be distributed to the individuals listed on that beneficiary form, regardless of what your will or trust says. Why is this important? Well, I’ll tell you about a situation I became aware of recently. A gentleman who had been married and divorced twice prepared a will that left all of his assets to his children from his first marriage. Most of his wealth was in his retirement plan, though.   He died unexpectedly, before he could get around to changing the beneficiary designation of that plan from his second ex-wife to his children. After his death, the second ex-wife (who had since remarried) received the very large retirement plan, and his children received the non-retirement assets, which were worth far less than the retirement plan. To add insult to injury, the second ex-wife made sure that his children knew that she had used her inheritance to buy herself and her new spouse very expensive cars – even going so far as to post photos on social media websites as proof! So your beneficiary designations are very, very important – so important that, in fact, if you’re my client I won’t even let you fill them out by yourself!

I like to give my clients as many options as I can. The beneficiary designation that I usually recommend gives your heirs as much flexibility as possible. It allows both your surviving spouse and your adult child, assuming that the child is the contingent beneficiary, to disclaim or refuse the inheritance to his or her own children (your children and/or grandchildren). Under current laws, this allows the children and grandchildren to take minimum distributions based on their own life expectancy. Will I still do this if the law changes? More than likely, yes, but the financial benefits will not be as significant as they were in previous years. If this topic interests you, then you’ll probably want to read Chapter 15 to learn about all the changes.

My next post will continue on the topic of beneficiary designations, and why they are important if your estate plan includes trusts. Stop back soon!

Jim

Jim Lange, Retirement and Estate Planning A nationally recognized IRA, Roth IRA conversion, and 401(k) expert, he is a regular speaker to both consumers and professional organizations. Jim is the creator of the Lange Cascading Beneficiary Plan™, a benchmark in retirement planning with the flexibility and control it offers the surviving spouse, and the founder of The Roth IRA Institute, created to train and educate financial advisors.

Jim’s strategies have been endorsed by The Wall Street Journal (33 times), Newsweek, Money Magazine, Smart Money, Reader’s Digest, Bottom Line, and Kiplinger’s. His articles have appeared in Bottom Line, Trusts and Estates Magazine, Financial Planning, The Tax Adviser, Journal of Retirement Planning, and The Pennsylvania Lawyer magazine.

Jim is the best-selling author of Retire Secure! (Wiley, 2006 and 2009), endorsed by Charles Schwab, Larry King, Ed Slott, Jane Bryant Quinn, Roger Ibbotson and The Roth Revolution, Pay Taxes Once and Never Again endorsed by Ed Slott, Natalie Choate and Bob Keebler.

If you’d like to be reminded as to when the book is coming out please fill out the form below.

Thank you.

Save

Save

Save

The Death of the Stretch IRA: It’s Time to Review the Retirement Plan Beneficiary Rules

The Death of the Stretch IRA, James LangeThose of you who have been following me for a while know that that one of my most cherished mantras is “Pay Taxes Later!” An extension of that mantra was my recommendation that, upon your death, your beneficiaries continue to take advantage of the minimum distribution rules to “stretch” your IRA for as long as possible so that they could achieve the maximum tax-deferred growth possible. This used to be a fairly straightforward concept but, with the increase in second and third marriages, as well as non-traditional marriages, it has become much more complicated.

To add to the confusion, there is increasing pressure from Congress to eliminate the Stretch IRA. This would be a very good time to review your retirement plan beneficiary rules, because you might want to change your designations. Non-spousal beneficiaries may soon be required to withdraw and pay taxes on inherited IRAs within five years. This idea was first introduced by Senate Finance Committee Chair Max Baucus in 2013, and was thankfully withdrawn for lack of support. It reappeared in 2013 as part of President Obama’s budget proposals, and again in 2013 as part of a bill to reduce student loan debt. Killing the Stretch IRA, they felt, would provide enough revenue to reduce student loan rates for college tuition for one year. That bill was passed by the House but died in the Senate by only two votes. Then in 2014 and 2015, President Obama’s budget proposals again included a provision to kill the Stretch IRA. It seems clear to me that this measure, or a similar one, may eventually pass.

So who should be named the beneficiary of your retirement plan? Is one option better than another? Chapter 13 answers these questions assuming that the benefits of the Stretch IRA will continue under the current rules, and also presents some options that you can consider if the Stretch IRA is eventually eliminated. This chapter also offers some guidance in naming trusts as beneficiaries. If done properly, this can protect your assets from your child’s creditors, including their former spouses.

Don’t forget to stop back soon for a sneak peek at Chapter 14, which expands on some concepts critical to understanding the benefits of the Stretch IRA!

Jim

P.S. Here’s a video on The Death of the Stretch:

Jim Lange, Retirement and Estate Planning A nationally recognized IRA, Roth IRA conversion, and 401(k) expert, he is a regular speaker to both consumers and professional organizations. Jim is the creator of the Lange Cascading Beneficiary Plan™, a benchmark in retirement planning with the flexibility and control it offers the surviving spouse, and the founder of The Roth IRA Institute, created to train and educate financial advisors.

Jim’s strategies have been endorsed by The Wall Street Journal (33 times), Newsweek, Money Magazine, Smart Money, Reader’s Digest, Bottom Line, and Kiplinger’s. His articles have appeared in Bottom Line, Trusts and Estates Magazine, Financial Planning, The Tax Adviser, Journal of Retirement Planning, and The Pennsylvania Lawyer magazine.

Jim is the best-selling author of Retire Secure! (Wiley, 2006 and 2009), endorsed by Charles Schwab, Larry King, Ed Slott, Jane Bryant Quinn, Roger Ibbotson and The Roth Revolution, Pay Taxes Once and Never Again endorsed by Ed Slott, Natalie Choate and Bob Keebler.

If you’d like to be reminded as to when the book is coming out please fill out the form below.

Save

Save

Save

What the Scaife Case Teaches Us: Using a Bank or a Lawyer as a Trustee doesn’t Guarantee Proper Fiduciary Care

5MU0KKFTThe late Richard Mellon Scaife. The trust at the center of the litigation was created in 1935 by his mother, Sarah Mellon Scaife. (Photo Courtesy of Tony Tye/Post-Gazette)

http://www.post-gazette.com/local/2015/01/15/Scaife-children/stories/201501150289

On January 15, 2015 the Pittsburgh Post-Gazette ran an article (Scaife children seek details on drained trust) outlining an ongoing court case between the children of Richard Mellon Scaife and the trustees of their grandmother’s trust. The trust was set up in 1935 by the children’s grandmother for the benefit of Richard Mellon Scaife, but apparently language in the document also suggested that some of the principal should be saved for R.M. Scaife’s children. When Mr. Scaife died in July of 2014, Jeannie Scaife and David N. Scaife found that the fund that had contained $210 million dollars in 2005 was now completely drained. They allege that the trustees for the account allowed and even encouraged inappropriate spending from the fund by the late Mr. Scaife.

This case offers a vivid illustration of a point that Pittsburgh CPA, James Lange, has been sharing with his clients for more than 30 years: Trusts are wonderful vehicles to protect and provide for your family for generations, but choosing the right trustees makes all the difference. Creating trusts with banks and lawyers as trustees, even after paying the enormous fees, doesn’t guarantee appropriate fiduciary care.

Lange insists that the moral of the story, no matter how the case turns out, is that most people, even billionaires, will usually be better off with reliable family members as trustees. The family members can hire accountants, attorneys, and money managers to help them manage and maintain the trust. If those people aren’t appropriate or fulfilling their duties properly they can be fired, but control is retained by the family instead of bankers and lawyers whose first duty might not be to your family’s legacy.

If you need help with your financial planning contact us at (800) 387-1129 or (412) 521-2732.

Save

7 Good Reasons to Change Your Will

1. You Get Married

Your new spouse doesn’t automatically become your chief heir. Most states give a spouse one-third or one-half of an estate. If you don’t have any children, your parents or siblings would get the rest. To leave all your property to your spouse, you’ll need a will. You cannot disinherit a spouse without his or her consent.

If you are living with someone but are not married and you want your significant other to inherit any of your property, you need a will.

2. You Become a Parent

Obviously, the big question is how your children will be cared for if both you and your spouse die. Now you definitely need a will to name a guardian for your children, as discussed earlier.

Consider using trusts, perhaps in your will, to handle assets that would go to your children. Execute a durable power of attorney naming your spouse or someone else to act for you in financial matters when you can’t. Durable power remains effective even if you become mentally unable to handle your own affairs.

3. You Approach Middle Age

Your assets are growing, so tax planning could save your heirs thousands in federal estate taxes. The time to act is when you and your spouse have a combined net worth, including house, retirement plans, and insurance proceeds, that approaches the amount vulnerable to the federal estate tax. You can give an unlimited amount to your spouse tax-free, by designating it in your will or by owning all assets jointly, for example. But with a little more planning, a married couple can leave twice the amount of the estate-tax exemption–up to $7 million after the second spouse dies, assuming that Congress reinstates the estate tax that lapsed at the end of 2009 and continues the $3.5 million exemption in effect at that time.

Some in Congress would like to boost the estate tax threshold to $5 million and reduce the tax rate to 35%. If they have their way, a married couple could exempt up to $10 million from estate taxes.

Update your will to reflect family births, deaths, separations, or divorces. Review guardian, trustee, and personal-representative appointments. Reevaluate the nature of specific gifts to people or groups. And recalculate how much life insurance you need.

 4. You Get Divorced

Review absolutely everything. The people in your life are changing. So must your estate plan. You need a new will altogether because in most states a divorce automatically revokes the provisions of a will that apply to a former spouse. In some states a divorce revokes the entire will.

You’ll want to set up trusts to control the assets you plan to leave your children. And revise any living trusts to remove your former spouse as a beneficiary or trustee. Do likewise with a durable power of attorney or a living will. Plus, unless restricted by a divorce decree, change the beneficiaries on your life insurance, pensions, and IRA.

5. You Remarry

You and your new spouse may have to plan for families from prior marriages and for children you have together. Consider a prenuptial agreement, should you want to keep assets separate and nullify your inheritance rights to each other’s estates.

You’ll want to provide for your new spouse and still be certain your children are taken care of. To do this, talk to an estate-planning lawyer about a qualified terminable interest property trust — QTIP, for short. This trust can be set up in a will to give your spouse the income from the trust property and some rights to principal. But when he or she dies, the assets go to beneficiaries you have chosen.

6. You Retire or Move to Another State

If you retire to another state (or any time you move to a new state, for that matter), have your estate-planning documents reviewed in light of that state’s laws and your current needs.

Durable powers of attorney become even more important. For example, if you are stricken with Alzheimer’s disease, you may become unable to give the required consent for financial transactions. Life insurance coverage may not be needed anymore. But if your estate faces an estate-tax liability or if your spouse is dependent on retirement income that will end with your death, consider keeping the coverage.

7. Your Spouse Dies

This loss can leave you emotionally vulnerable to financial mistakes. For at least several months, avoid selling your house or making other drastic changes.

Seek expert advice. There may be tax benefits to disclaiming some of your inheritance in favor of alternate beneficiaries, such as your children, if your spouse’s estate is subject to the federal estate tax and you have enough assets of your own, including liquid assets.

You’ll need to get a new will and, if needed, a revocable living trust. Execute a new durable power of attorney and a living will (which expresses your wishes in case of an illness that leaves you permanently incapacitated). Put these in a safe place, and tell people who need to know where they are.

Beneficiary Designations in a Second Marriage

Estate planning can be tricky to begin with — toss in a second spouse and children from different marriages and relationships and it becomes even more difficult.

Recently, Jim Lange came across an article in the Pittsburgh Post-Gazette that dealt with the estate planning challenges caused by divorce and remarriage.  The example that was used was that after 15 years of a second marriage, a husband was getting ready to retire with $1 million in his IRA.  His second wife was shocked to learn that she had no ownership rights to the account.

One of the proposed solutions listed in the article was a tool called a QTIP trust (qualified terminable interest property trust).  In this case, a QTIP trust would be listed as the beneficiary of the husband’s IRA and would then provide an income stream for the surviving spouse while protecting a portion of the assets for the children.

Jim thinks that this is the wrong approach and offered his solution in a letter to the editor.  Jim’s first point is that naming a QTIP trust as the beneficiary of an IRA accelerates income and taxes to the detriment of both the surviving spouse and the children.  The surviving spouse is left with only an income stream and the kids don’t inherit anything until the second spouse dies.  He’s also concerned about the fees generated by the QTIP trust solution — attorneys have to be paid to draft the trust and annual CPA and trustee fees have to be paid after the first death.

Instead, Jim prefers to leave a certain percentage of the IRA to the surviving spouse and give the rest to the children of prior marriages.  It’s a simple solution that provides more money for the heirs and less for the IRS.

Coincidentally, the topic of the June 3rd edition of our radio show, The Lange Money Hour, was trusts — so, we started the show with a discussion about the Post-Gazette article.  A special thank-you to a guest who agreed to join us on short notice — Tom Crowley, Senior Wealth Planner and VP at PNC Wealth Management.  While Tom agreed with Jim about the tax consequences of naming a QTIP trust as beneficiary of an IRA, he pointed out that in his practice, some clients are willing to sacrifice more money in taxes in order to gain greater control over the distribution of the funds.

During the rest of the show, Jim went on to explain the ins and outs of various trusts including living trusts, spendthrift trusts, charitable trusts and trusts for minors.  Keep in mind that every case needs to be evaluated on an individual basis.  If you have questions about any of these trusts or think that you need a thorough review, be sure to call the office at 412-521-2732 and a member of the Lange team can help.